(The article featured below is a selection from PCAOB Reporter, which is available to subscribers of that publication.)

PCAOB Adopts Annual and Special Reporting Framework for Registered Public Accounting Firms

The The PCAOB approved new rules for the filing of annual and special reports by registered public accounting firms as contemplated by the Sarbanes-Oxley Act. The new rules and forms differ in some ways from the proposing release in response to the 12 comment letters that were received. The new reporting requirement was unanimously approved by the Board, which welcomed Steven Harris as its newest member. The new filing requirements will assist the Board in planning its inspections. The new reporting rules may not constitute the only reporting requirements the Board will adopt. A Treasury Department advisory committee has recommended disclosure beyond that adopted by the PCAOB.

New Form 2 will be used for firms' annual reports and Form 3 will be used for special reporting obligations. The forms will be filed electronically through a Web-based system. The rulemaking release will not serve as a practical guide, according to deputy general counsel Michael Stevenson, but the staff contemplates the issuance of written guidance as the compliance deadline grows nearer. The rules will take effect 60 days after SEC approval, rather than 21 days as contemplated by the proposing release. The first annual reports would be filed June 30, 2009.

Following SEC approval, firms will have a one-time reporting obligation on Form 3 to report any events that merit disclosure since the firms' registration. After the so-called "catch up" Form 3, firms will have 30 days to file reports relating to significant events. The catch up filing does not have to detail every reportable event that has occurred since registration, but only those that are still current. Stevenson predicted that the requirement will not pose a significant burden because most firms will not have experienced any reportable events.

Firms will be required to pay an annual fee each year to cover the staff reviews of their reports. The fees have not been set, and will be announced closer to the time the rules take effect. The confidential treatment provisions in the final rule closely track the proposal. The filings will be posted almost immediately after their filing with the PCAOB with any confidential request material redacted. A firm has the right to seek reconsideration if its request is denied.

Non-U.S. firms will be permitted to withhold information from their reports if the disclosure would violate their local laws. These firms must submit materials to the Board that substantiate the legal conflict, and must make an attempt to overcome the conflict. These firms also must certify that the conflicted materials are in their possession. The Board has the discretion to require the disclosure of the information.

The Board adopted a less proscriptive approach to the amendment of the annual report to correct errors or omissions. The Board will permit alternative approaches for calculating the disclosure about the percentages of the types of fees the firms received. The methodology that is used to calculate the percentages will be disclosed in an exhibit to Form 2.

Board member Daniel Goelzer noted that the information that will be filed under the new rules is limited to issues that relate to the Board's responsibilities and primarily to its inspection function. The majority of registered U.S. firms submitted their applications in 2003, he observed, while the majority of non-U.S. firms submitted theirs in 2004. The data is now between four and five years old, he said, and the updated reporting system will assist with the planning of inspections.

Goelzer also expressed support for the provision of a plain English guide to periodic reporting, particularly to help small firms comply. The Board's small business forums will also provide a means for issuing advice and guidance, he said.

Goelzer asked whether the new rules encompass a standard of care with respect to the accuracy of the filings. Stevenson advised that they do not, but the filings must be timely, accurate and complete. If they are not, he said the Board may consider which statutory sanctions would apply based on the firm's state of mind.

Another change from the proposing release is the elimination of a requirement that firms report affiliations with principals of a firm that was sanctioned, even if the individual was not. Stevenson said that commenters pointed out that, as a matter of fairness, the information should not be included because it could diminish a person's professional opportunities. Goelzer agreed that it was the right decision. He gave an example of the Arthur Andersen firm and the hundreds of former employers who would have triggered such reports.

A second proposal would have required an audit firm to report if it withdrew its audit opinion but the company failed to file a Form 8-K to report that event. A second element would have required the firm to report the unauthorized use of an audit opinion. Goelzer noted that the final rule retained the first element but deleted the second.

Stevenson said that commenters pointed out that the requirement would seek to have firms report an event that the company should have reported. Commenter said that the reporting was best left to the SEC's disclosure framework under section 10A. The Board believes that a withdrawn audit report is a risk indicator of which it should be aware.

Board member Charles Niemeier believes the rules provide a platform for future reporting requirements the Board may consider. The dialogue on that possibility has begun with the Treasury's advisory committee report, he said. Niemeier said he hopes the Board will issue a concept release to build upon the new reporting requirements. Under the new rules, auditors for the first time will have a vehicle for reporting the withdrawal of their audit reports, he said. That information will help the Board assess the likelihood of an audit failure, in his view.